Has the American system for insuring against
hurricane losses failed?
A lot of knowledgeable people think so, even if
they don’t agree with Jim Hood.
Hood is the Mississippi attorney general who
filed suit against several major insurers claiming that standard
flood exclusions were ambiguous and contrary to public policy and
that carriers should pay for all losses to insured properties
arising from Hurricane Katrina.
Hood’s suit was immediately dismissed as
political grandstanding with little chance of success by insurance
industry spokespersons. They argued that the distinction between
windstorm and flood damage has been well-recognized for decades, and
that the provisions Hood was contesting had been approved by his
state’s insurance department.
Public officials from both major political
parties distanced themselves from Hood’s suit, warning that any
attempt to rewrite contracts retroactively would damage
Mississippi’s business climate. At press time, no rulings had been
made.
Still, there is a growing chorus of people
calling for fundamental change in how common policy forms address
what the average consumer experiences as “storm damage.”
“One may want to rethink whether flood
insurance could be incorporated into a homeowner’s policy along
with other natural hazards with some type of federal reinsurance to
cover catastrophic losses,” says Howard Kunreuther, co-director of
the Risk Management and Decision Processes Center at the Wharton
School of the University of Pennsylvania.
Kunreuther, one of the nation’s leading
experts on insurance and natural disasters, says that incorporating
flood coverage into homeowners policies would “avoid the
wind-water controversies that occur after a hurricane.”
That controversy was painfully in evidence at
Mississippi hearings where legislators heard complaints about lack
of coverage for water losses from citizens who lived outside of
established flood plains, and thus were not required to purchase
flood insurance.
The scale and scope of the losses from Katrina
added impetus to a call for a uniform national disaster insurance
policy advocated by insurance commissioners from several large
states.
Commissioners from California, Florida, and New
York are scheduled to meet in mid-November with representatives of
the National Association of Insurance Commissioners (NAIC) to
discuss development of a “single methodology” for addressing
regional catastrophic perils on a nationwide basis.
“The current insurance structure is a failed
model,” said Florida Commissioner Kevin McCarty. “Citizens
deserve a comprehensive insurance policy that covers all perils.”
“The disaster insurance system in the U.S. is
broken. It’s time we fixed it,” writes Liz Pulliam Weston,
personal financial columnist for “Money Central” on the msn.com
network.
Like McCarty, Pulliam Weston advocates that
“disaster coverage--insuring against quakes, floods, hurricanes,
wildfires and maybe even terrorism--would be part of every
homeowner’s premium, with the amount charged depending on the
policyholders’ expected risk.”
That general refrain was echoed by Florida Gov.
Jeb Bush, who reportedly endorsed proposals for comprehensive
national disaster insurance in remarks at a meeting in Tallahassee.
“It is appropriate to share the risk across
the country,” he said, in comments reported by the Miami Herald.
"There isn't a place in the country that is immune to being
affected by a flood, wildfire, or storm.”
Gov. Bush subsequently endorsed a bill in
Congress that would direct the U.S. Treasury to auction reinsurance
contracts that would cover losses arising from earthquakes,
hurricanes, and typhoons.
Also, the “single methodology” being
explored by some insurance commissioners explicitly includes
terrorism as a peril to be covered, an apparent enticement for
inland states to support a program that addresses natural hazards
primarily affecting the coasts.
As those initiatives suggest, there is great
emphasis among proponents of national disaster insurance to address
perils affecting different areas of the country, in hopes of
spreading risks and costs, as well as sustaining political support,
across regions.
“Clearly, a national strategy is required in
which the government, the insurance industry and the private sector
collaborate to provide a more secure, reliable and affordable safety
net for disaster victims," wrote Gregory Serio, former
superintendent of insurance in New York, in a column in the National
Underwriter.
Criticism of the current insurance mechanism is
not limited to those outside the insurance industry.
Markham McKnight, president and COO of Wright
& Percy Insurance, Baton Rouge, La., recently told a U.S. House
subcommittee that even a prudent insurance buyer is not fully
protected when he or she purchases coverage under the National Flood
Insurance Program (NFIP).
In a subsequent interview, McKnight cited two
problems with the current system of providing wind coverage through
a private insurer or state pool and flood coverage through the NFIP.
“There is no dovetailing of the coverages
provided under the different policies,” he said, “and there is
no dispute resolution mechanism” when the property insurer and the
NFIP do not agree on the cause of a loss.
The NFIP’s residential property policies
provide no coverage for extra living expenses or loss of access due
to order by a civil authority, he notes, and its commercial policies
provide no coverage for business income or extra expenses.
“A consumer could buy all the insurance
available, get hit by a storm, and still get caught without
coverage,” he said.
McKnight proposes that national advisory
organizations draft flood coverage endorsements that would add flood
as an insured peril under standard homeowners and commercial
property policies, but that the flood exposure be reinsured by the
NFIP.
Claims should be settled on the basis of
“reverse interplay,” McKnight adds.
“Interplay” refers to the practice of
insurers’ depositing claims payments with a court in situations
where they are unsure who should receive payments. “Reverse
interplay” would have policyholders reimbursed promptly, with the
property insurer and NFIP left to hash out their shares afterward.
Before junking the current system, however,
policymakers need to understand where the real shortcomings were
after Katrina hit.
It may surprise readers to learn that the vast
majority of owner-occupied dwellings in New Orleans--81,000 of
84,000 in Orleans Parish--had flood insurance, according to Edward
Pasterick, senior advisor for the Federal Emergency Management
Agency (FEMA).
This suggests that mortgage lenders have been
successful in enforcing requirements that any mortgaged property
located in a flood plain be insured for flood. (Relatively few
commercial properties in New Orleans had NFIP policies, Pasterick
adds, but an undetermined amount had private flood coverage.)
Any problem in New Orleans itself, says
Pasterick, lay with renters who, for the most part, did not have any
insurance at all, and may not have been better off if they did.
Technically, a renter forced to evacuate due to
a civil order in the wake of the flood would have had no coverage at
all for extra living expenses either from a standard tenant’s
policy or from a federal flood policy.
The former provides coverage only for loss of
use arising from civil orders related to damage by insured perils,
and the latter provides no living expense coverage at all.
In most cases, recovery for personal property
damage would have been slim compensation for the trauma and cost of
dislocation. For evacuees who had been living on upper floors, there
may have been no direct damage to personal property beyond some
spoiled food; hence, no recovery at all.
Without involvement of a mortgage lender,
there’s no “trigger point” to induce renters to purchase wind
or flood coverage, says McKnight. Given the limitations on the
coverage available, it is easy to see why people of limited means
would forgo purchasing it.
The biggest challenge to the current system for
covering wind and water losses will not arise from the propertyless
people within the flood zones of the Gulf, but
from property owners outside those zones.
Pasterick estimates that only 15% of properties
had flood insurance in five counties of Alabama and Mississippi
affected by flooding caused by Hurricane Katrina.
That situation led to the unusual initiative of
U.S. Rep. Gene Taylor (D-Miss.) who introduced a bill that would
allow property owners outside designated flood plains to purchase
federal flood coverage retroactively. His proposal would require
applicants to pay a premium equivalent to the last 10 years’
premiums, plus a 5% penalty, and commit to remain in the program for
years to come.
Pasterick fears such a measure would reinforce
the tendency of people in disaster-prone areas to avoid tough
choices because they believe the federal government will always come
to their aid in some way.
McKnight believes the Taylor approach may be a
necessary one-time expedient to avoid further burdens on the
insurance industry, however.
As recovery proceeds, “expect public debate on
the role private insurance plays in disaster recovery,” reads a
white paper developed by Tillinghast-Towers Perrin, the
international actuarial and reinsurance firm ( www.towersperrin.com/tillinghast
).
Among the questions Tillinghast says will be
debated is this: “Is mandatory integration of flood and earthquake
coverage into homeowners policies needed?”
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Wind or Water?
